The Reserve Bank held the official cash rate at 5.5% on Wednesday but noted economic indicators may suggest monetary policy was hitting demand harder than expected.
RBNZ’s seven person Monetary Policy Committee agreed monetary policy needed to “remain restrictive” and also that it could be loosened as inflation falls.
“The extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures,” they said in the April meeting notes.
“Some domestically generated price pressures remain strong. But there are signs inflation persistence will ease in line with the fall in capacity pressures and business pricing intentions”.
The Kiwi dollar fell sharply immediately after the announcement from US61.3c to US60.9c in a clear sign that the financial markets saw the comments from the RBNZ as more 'dovish' than had been expected. Wholesale interest rates also dropped quite sharply with, for example, the two-year swap rate falling by 8 basis points.
Economists expected the central bank to hold the OCR steady in this meeting, but have been calling for policymakers to rethink their plan to leave rates unchanged until late next year.
At its meeting in May, the RBNZ was surprisingly hawkish. It lifted its OCR projection to peak at 5.65% and pushed possible rate cuts out until August 2025.
But last week, a survey of businesses found 28% had experienced a drop in activity during the past three months and 25% had laid off staff — similar to in the Global Financial Crisis in 2007.
Treasury said it showed the economy may have contracted during the June quarter and that fewer firms were raising prices “despite elevated but stable costs”.
Stephen Toplis, head of research at BNZ, said the survey showed inflation had been beaten and virtually “screamed” for monetary policy to be relaxed sooner rather than later.
The same data caused economists at ASB Bank to shift their forecast for interest rate cuts to begin this November, instead of in February next year.
Nick Tuffley, the bank’s chief economist, said unnecessarily damaging the economy and employment levels had overtaken inflation as the biggest risk facing the RBNZ.
Falling faster
The record of the RBNZ's Monetary Policy Committee meeting on Wednesday showed the committee agreed there was “more evidence of excess productive capacity emerging” and signs the economy may be falling below forecasts.
It noted recent higher frequency indicators were suggesting that near-term growth in business activity had weakened, likely a reference to the NZIER’s quarterly survey.
“A range of business and consumer surveys, and higher frequency spending and credit data, all point to declining activity,” the committee said.
“Members discussed the risk that this may indicate that tight monetary policy is feeding through to domestic demand more strongly than expected”.
The RBNZ has previously forecast inflation in the June quarter to be 0.6% and bring the annual number down to 3.6%. It expects economic activity to grow extremely slowly for the rest of 2024, while unemployment climbs to 5%.
Many other economists now think activity will actually go backwards, unemployment will climb well above 5%, and inflation will fall faster than expected.
Some commentators said they would be reading the record of the meeting for possible signals the Reserve Bank was setting the scene for rate cuts sooner than previously indicated.
In the notes, committee members said the Selected Price Indexes showed weakening price pressure on more volatile inflation components, and a fall in businesses’ pricing intentions.
This helped to confirm their belief that headline inflation should return to within the 1% to 3% target range before the end of the year.
“Domestic inflation measures remain more persistent, but growing excess capacity in the domestic economy provides greater certainty that they will sustainably decline,” they said.
111 Comments
"The Committee discussed the.... risk that price setting behaviour and inflation expectations could normalise more rapidly as headline inflation declines." = Kiwis will immediately go back to what they are conditioned to do, ramp up property prices, when it cuts the OCR.
November you say? Tuesday the 5th, that would be? And if DJT is elected, then are we still a go for 50bp when the flood of Debt is released on the World to stimulate more growff and its trusty companion, price rises? Or, maybe worse. Sleepy Joe gets back in. But not too worry. The French should be erecting a new structure in the Place de la Concorde by then....
Prices can only ramp up as much as demand. If they take it back to the stupid low rates that they kept in place for way too long, yes everything will go up accordingly. However, if everyone at the RBNZ put all of their brains together and create half a decent brain, maybe they will take rates back to around 4%, keeping retail rates in the 5%s, providing balance and can make subtle adjustments from there as needed.
Though wouldn't surprise me if Orr steers this ship straight into a cliff, panics and goes full swing the other way, backing into the dock. Steady is not in that mans abilities. Other than receiving a very steady income from tax payers.
I am hoping Orr has learned by now to be conservative and cautious.
I reckon now a .25 cut in November along with a warning that if inflation doesn't stay in the target band that the ocr will not drop further or will need to rise again. And a warning it's not going back to the low ball days... perhaps with a recommendation for luxon to implement more house price controls to avoid rapid price gains.
Basically best bet is to give the economic flame a tiny bit of oxygen and the watch to make sure he can control the heat.
His reputation was left in tatters after the failure to start ticking the OCR up in 2020 after the RBNZ took drastic action to flood the country with cheap credit, failing on all his performance objectives for his role. He is now not only responsible for having a large influence on the NZ economy, but if anything else fails on his watch that he is remit to oversee, the country will demand his head to roll. I'd be of the thinking that he is well aware of this, and his doubled salary depends on it.
As expected.
Additionally for those assuming that the first OCR cut is going to be some saving grace for the economy and property market is akin to believing that a dying patient is going to be instantly saved when the ambulance arrives, not when the patient as actually in the hospital being operated on by a surgeon.
OCR will likely start to drop in early 2025 with some actual respite mid to late 2025.
"...that the first OCR cut is going to be some saving grace for the economy and property market..."
Um. Seriously? The property market is not where most of the people in NZ Inc are employed.
To relate the effects of the OCR to NZ's economy - only on the effects it has on the residential property market - is a nonsense.
Apparently members of the committee 'discussed the risk that... tight monetary policy is feeding through to domestic demand more strongly than expected'. The Committee also discussed 'signs of easing in the labour market'.
Listen to the language... 'discussed risk' and 'signs of easing'. Nobody who looks at the data would be using this language. The economy is imploding.
Not that shaving a few basis points of the OCR is going to make any difference of course.
Take a look at the jobs chart here and we can chat about what defines imploding.
https://www.interest.co.nz/business/128662/bnz-says-falling-job-ads-are…
Too much immigration putting the job market now in line with 2014 and plenty more to go to 2008 levels, which we are likely to be in line with within 6 months or so. Immigrants that can't find work will begin to leave. Inflationary pressures subside.
I don't see a problem, this is by design.
Exactly, making staff redundant can be a nightmare these days. It’s safer to just cut their hours or don’t increase their salary if you’re looking to trim the herd. This is reflected in the reasonably low unemployment figures with a massive drop off in advertised positions.
This is what happened to a young friend of mine, employed in a cafe. Everyone has had their hours cut back, so that its now hard to survive on the part time wages. This will last until one of them quits, and the others get to pick up that person's shifts. Its easier for the employer to keep everyone available but just pay them less.
No, in early 2025 we will have imploded. We are currently imploding!
It's all very August 2008.
Orr right now... https://ibb.co/R76H1GQ
Crazy Horse comes in off the plains, after buffalo hunt ....to this news.
"Mmmmmm" he mumbles to himself and sighs "Chief Orr has been through all this, when he was way over east, over the bluffs, for the GFC and he knows human nature and their use of debt"
As 2 crows circle overhead, Crazy Horse looks up and ponders "what do those 2 crows represent ?"
"I know !" he exclaims loudly at the crystal blue sky "It's Ashley Church and Tony the Comb, realising its all over"
In the distance, a straggly herd of sheep reach their heads up to the sky, looking at the 2 crows, earnestly asking "What are we to do oh great ones?"
Ashley Church, the more stoic one cries down to the bewildered sheep, in a suddenly excited screech "Remember to keep buying, as it doubles every 10 years, as interest rates will come down - eventually"
And the sheep wandered off feeling much relief with their financial futures ....
Meanwhile Crazy Horse takes a slow drawl on peace pipe and wistfully thinks "what will it take to wise up these sheep and make them realise debt is not wealth".
Rates were too low for about 3 years. In the reserve bank I would expect their timing to be just as bad going the other way. Dynamism is not something I think of when talking about an organization that fleeced the NZ tax payer to benefit Australian banks for 2 years via the funding for lending program.
Same people, same incompetence, does anyone really expect a result other than one that benefits the banks.
Dynamism is not something I think of when talking about an organization that fleeced the NZ tax payer to benefit Australian banks for 2 years via the funding for lending program.
ASB CEO said that FLP was an "investment in NZ", not cheap debt to preserve the Ponzi.
She's climbed to the top of the pile so society views her as being smarter and more capable than your average bear.
Always two groups of radicals on here , either want to hike the OCR more or cut the OCR tomorrow. I can’t help but think at this point it’s just for the sake of not having the same view as the mainstream economists. It’s going to be pretty funny if we just end up having a softish landing. A slow drip-feed cut (25bp) from Nov 24/Feb 25 is the move.
I don't see anything wrong with different viewpoints. However, based on my interactions at the water cooler, the consensus leans towards navigating the debt mountain at the individual, h'hold, and local govt levels. People are largely tapped out and there only appears to be one lever that ameliorates the pain and suffering.
I normally discuss what I think will happen, not what I want to happen. What do I think will happen - inflation well and truly within band by September and the RBNZ way too slow to make meaningful cuts. What do I want to happen - RBNZ cut rates today to 0% just before I fix my mortgage.
"Always two groups of radicals on here , either want to hike the OCR more or cut the OCR tomorrow. "
Good comment.
Most Kiwi's love a false dichotomy.
Arguing nonsensically about nonsense 'choices' make them feel 'wise'.
All indicators in the developed economies seem to be pointing towards firing up the printers, except perhaps Japan. And as for Aussie, the ruling elite doesn't seem to give a rats about inflation anyway. And if something breaks (if it hasn't broken already - a thesis that I think is quite possibly the reality but is not evident to everyone just yet), the central banks will go harder and faster.
Bring it on. And hope people have their survival strategies worked out.
They really couldn't care less about inflation over there, everything is geared to higher house prices and falls are not tolerated. I have an interest over there and the growth is eye-watering.
I think eye-watering is an understatement. It makes the Japanese period of property-driven wealth generation look sober.
Yep, normally the A$ would be hammered but they have such a strong trade surplus offsetting primary account outflows that it holds very up well against all but the big $.
The iron ore price continues to confound me. My conspiracy theory triggers tell me that China can't have the price falling as their stockpiles are too large. Iron ore is debt collateral in China.
"All indicators in the developed economies seem to be pointing towards firing up the printers". Absolutely spot on. It's what we did last time, and the time before that, and the time before that.... and it always, ALWAYS, ends the same way - a reduction in what Real Wealth most people have. And if 'most people' haven't realised what's happening by now, they will. And then, the Gate of Interest Rate Hades will open as 'they' try to reign in the runaway price rises that are rampaging everywhere. I wonder what the name of the next Paul Volker will be?
The danger of cutting rates too soon is that inflation will re-emerge with the risk of hyper-inflation.
I don't think that many commentators really have any idea what hyperinflation looks like. If you have a few minutes to spare have a look at the following:
https://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhy…
I don't think that many people talking about hyperinflation really have any idea about the narrow circumstances in which the phenomenon arises. I'll give you a clue - it always involves countries having massive debts denominated in a more powerful country's currency.
I have to say I completely agree with you. Given how our economy is wired, if the private sector starts to repay debt more quickly than we take it out, we're all going down the swanny. Look how reliant we are on that juicy credit money.
Yes. Problem is we're all affected if the levee breaks, regardless if you're late to the party or not. Even those who chose not to join are affected. This is what the ruling elite needs to get into their heads. They're directly affected too. Popularity and also in their hip pocket.
Everyone is talking about the residential market. There is another market that is on the point of collapse, and that’s the commercial property market. Shops, offices and factories make up billions and billions of dollars at risk of excessive borrowings. When commercial was fought over if it returned 5 percent net, it was a great deal. Now with mortgages over 7 percent for commercial, not to mention increasing vacancies, expect a rumble by Xmas.
Most of the really big players like Precinct are not using enough bank based lending to cause the banks too much trouble. Its going to hit some Family trusts a bit. The increased vacancy rate will cause some forced selling for sure.
Commercial issues will be more obvious faster then Resi....
IMHO the bigger threat is once Commercial has played out, everyone will wake up to the fact that residential is
Way way way way way way overvalued relative to yield.
So the failures in Prime Commercial will flow across into subprime Manurewa, Flat bush
What can go wrong in a 360 billion dollar book that's around 65% of lending in NZ?
EDIT: BigDaddy - I guess if banks hold cross security on high end Resi then it may also hit Remuera, Fendalton and Herne bay , lending is complicated banks do a lot to extend loans in good times, but insist on decent security. This thing could have legs....
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